Introduction to Self-Invested Pension Plans

A self-invested personal pension plan offers individuals greater control over how their pension cash is used, as opposed to a plan like QROPS for expatriates. But it is important to take SIPP advice in advance.

A self-invested personal pension plan (SIPP) allows an individual complete control over the investments that go into their pension plan. It is an alternative to the more usual contribution-based personal pensions plans used by many people.

SIPPs offer a number of advantages over more conventional pension schemes, but they are not suitable for everyone. To operate a self-invested pension efficiently requires a good understanding of investments. The rules can be quite complex to the inexperienced, but for someone with the knowledge or confidence to take one on, a SIPP pension has the potential to do well.

Key Features of SIPP Pensions

With a conventional pension plan the individual hands funds over to a pension company who invest the money on their behalf. Eventually, when the individual retires, their pension fund is the total value of those investments.

A SIPP pension is very similar in that money is invested to create a pot of savings for retirement. The key difference is that the individual remains in control of exactly what those investments are. There are rules governing what can and cannot be invested in a SIPP. Permitted investments include cash, unit trusts, fixed income instruments including gilts and traded endowment policies.

At one point the UK government considered allowing people to include investment in fine art, classic cars and even residential property. However, these plans were shelved. A trustee will need to be appointed for the SIPP fund, but the individual remains in control of their investments.

Advantages of SIPPs

The main advantage of all pension plans is tax relief. This means the government pays a tax rebate into a pension plan in proportion to the amount of cash that goes into it, and up to the highest rate of tax paid by the individual.

A self-invested pension offers several additional advantages. These are:

The individual remains in complete control of their investment portfolio.

Commercial property can be used as an investment.

A lump sum, up to 25% of the pension fund, can be withdrawn at age 55 (50 until 2010).

Investments in the pension fund are free from Capital Gains Tax.

Disadvantages of SIPPs

This form is pension is not suitable for everyone. To operate a SIPP effectively requires a good knowledge of investment instruments, although it is possible for an individual to appoint an investment manager to handle this for them.

There are costs associated with setting up and running a SIPP. If these are not managed, it could become a poor investment vehicle.

As with all forms of investment, a self-invested pension is not risk free. Investments can fall as well as rise in value. To maximise the value of a SIPP the individual needs to monitor its performance regularly and make changes where necessary.

Anyone considering using a self-invested personal pension for all or part of their pension provision should take SIPP advice. A good financial advisor will be able to help determine whether this is a suitable route for them to take, based on their financial circumstances and a comparison of other products that are available.